INTRAOP MEDICAL CORPORATION

CONSOLIDATED FINANCIAL REPORT

SEPTEMBER 30, 2021











INTRAOP MEDICAL CORPORATION

TABLE OF CONTENTS










|                                                 | Page
|------------------------------------------------ | ----
|INDEPENDENT AUDITOR’S REPORT                     | 1-2 
|CONSOLIDATED FINANCIAL STATEMENTS                |     
|Consolidated Balance Sheets                      | 3   
|Consolidated Statements of Operations            | 4   
|Consolidated Statements of Stockholders’ Deficit | 5   
|Consolidated Statements of Cash Flows            | 6   
|Notes to Consolidated Financial Statements       | 7-34













|
|



INDEPENDENT AUDITOR'S REPORT



Board of Directors

IntraOp Medical Corporation



Report on the Financial Statements

We have audited the accompanying consolidated
financial statements of IntraOp Medical Corporation and its subsidiaries (the “Company”), which comprise the consolidated
balance sheets as of September 30, 2021 and 2020, the related consolidated statements of operations, stockholders’ deficit and cash
flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the “financial statements”).



Management’s Responsibility for the Financial Statements

Management is responsible for the preparation
and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of
America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement, whether due to fraud or error.



Auditor’s Responsibility

Our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in
the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free from material misstatement.



An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In
making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.



We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our audit opinion.





|160 West Santa Clara Street, Suite 600, San
                         Jose, CA 95113 T: 408.294.3924 F: 408.295.3925
                         
                         877.754.4557 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 





1







Board of Directors

IntraOp Medical Corporation



Opinion

In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and
the results of its operations and cash flows for the years then ended in accordance with accounting principles generally accepted in the
United States of America.



Emphasis of Matter Regarding Going Concern

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered operating losses and cash flow deficits from operations which raises substantial
doubt about its ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans
regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty. Our opinion is not modified with respect to this matter.









SingerLewak LLP



April 26, 2022



2







INTRAOP MEDICAL CORPORATION

CONSOLIDATED BALANCE SHEETS

September 30, 2021 and 2020










ASSETS



|                                                 |  | 2021 |            |  | 2020 |  
|------------------------------------------------ |  | ---- | ---------- |  | ---- | -
|Current assets                                   |  |      |            |  |      |  
|Cash and cash equivalents                        |  | $    | 4,034,670  |  |      | $
|Accounts receivable                              |  |      | 416,080    |  |      |  
|Inventories                                      |  |      | 1,134,870  |  |      |  
|Prepaid expenses and other current assets        |  |      | 563,485    |  |      |  
|Total current assets                             |  |      | 6,149,105  |  |      |  
|Property and equipment, net                      |  |      | 5,393,594  |  |      |  
|Property leased to others under operating leases |  |      | 2,079,153  |  |      |  
|Restricted cash                                  |  |      | 44,190     |  |      |  
|Intangible assets, net                           |  |      | 1,382,224  |  |      |  
|Goodwill                                         |  |      | 4,746,994  |  |      |  
|Total assets                                     |  | $    | 19,795,260 |  |      | $



LIABILITIES AND STOCKHOLDERS' DEFICIT





|Current liabilities                                                              |  |   |              |   |  |  
|-------------------------------------------------------------------------------- |  | - | ------------ | - |  | -
|Related party notes payable, short-term                                          |  | $ | 5,000,000    |   |  | $
|Related party convertible promissory notes, net of debt discount, short-term     |  |   | 18,557,665   |   |  |  
|Loan payable                                                                     |  |   | -            |   |  |  
|Capital lease obligation, short-term                                             |  |   | 3,781,164    |   |  |  
|Accounts payable                                                                 |  |   | 1,770,991    |   |  |  
|Accrued expenses                                                                 |  |   | 7,653,018    |   |  |  
|Customer deposits                                                                |  |   | 637,768      |   |  |  
|Deferred revenue                                                                 |  |   | 617,718      |   |  |  
|Deferred profit on sale leaseback, short-term                                    |  |   | 963,938      |   |  |  
|Derivative liability, short-term                                                 |  |   | 6,412,484    |   |  |  
|Deferred rent                                                                    |  |   | 2,957        |   |  |  
|                                                                                 |  |   |              |   |  |  
|Total current liabilities                                                        |  |   | 45,397,703   |   |  |  
|                                                                                 |  |   |              |   |  |  
|Convertible promissory note, net of debt discount, long-term                     |  |   | 2,154,135    |   |  |  
|Capital lease obligation, long-term                                              |  |   | 2,265,653    |   |  |  
|Deferred profit on sale leaseback,  long-term                                    |  |   | 1,882,806    |   |  |  
|Derivative  liability, long-term                                                 |  |   | 675,000      |   |  |  
|Deferred tax liabilities                                                         |  |   | 105,516      |   |  |  
|                                                                                 |  |   |              |   |  |  
|Total liabilities                                                                |  |   | 52,480,813   |   |  |  
|                                                                                 |  |   |              |   |  |  
|Commitments and Contingencies (Note 9)                                           |  |   |              |   |  |  
|                                                                                 |  |   |              |   |  |  
|Stockholders' deficit                                                            |  |   |              |   |  |  
|Convertible preferred stock, $0.00001 par value: 47,348,161 shares authorized:   |  |   |              |   |  |  
|29,759,583 shares issued and outstanding (liquidation preference of $30,921,113) |  |   | 298          |   |  |  
|Common stock, $0.00001 par value: 55,000,000 shares authorized;                  |  |   |              |   |  |  
|1,631,462 and 1,450,212 shares issued and outstanding, respectively              |  |   | 17           |   |  |  
|Additional paid-in capital                                                       |  |   | 31,576,661   |   |  |  
|Accumulated deficit                                                              |  |   | (67,388,605  | ) |  |  
|Non-controlling interest in UK joint venture                                     |  |   | 3,126,076    |   |  |  
|                                                                                 |  |   |              |   |  |  
|Total stockholders' deficit                                                      |  |   | (32,685,553) |   |  |  
|                                                                                 |  |   |              |   |  |  
|Total liabilities and stockholders' deficit                                      |  | $ | 19,795,260   |   |  | $



See Notes to Financial
Statements



3







INTRAOP MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended September 30, 2021 and 2020










|                                                           |  | 2021 |             |   | 2020 |  
|---------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Revenues                                                   |  | $    | 7,193,417   |   |      | $
|Cost of revenues                                           |  |      | 5,846,320   |   |      |  
|Gross profit                                               |  |      | 1,347,097   |   |      |  
|Operating expenses                                         |  |      |             |   |      |  
|Research and development                                   |  |      | 1,760,924   |   |      |  
|Sales and marketing                                        |  |      | 3,811,432   |   |      |  
|General and administrative                                 |  |      | 4,963,246   |   |      |  
|Total operating expenses                                   |  |      | 10,535,602  |   |      |  
|Loss from operations                                       |  |      | (9,188,505  | ) |      |  
|Other income (expense):                                    |  |      |             |   |      |  
|Other income                                               |  |      | 25,692      |   |      |  
|Profit on sale leaseback                                   |  |      | 1,449,057   |   |      |  
|Change in fair value of derivative liability               |  |      | (778,742    | ) |      |  
|Payroll Protection Program loan forgiveness                |  |      | 493,600     |   |      |  
|Interest expense                                           |  |      | (5,135,060  | ) |      |  
|Total other expense                                        |  |      | (3,945,453  | ) |      |  
|Loss before provision for income taxes                     |  |      | (13,133,958 | ) |      |  
|Income tax provision                                       |  |      | (14,558     | ) |      |  
|Net loss                                                   |  | $    | (13,148,516 | ) |      | $
|Net (loss) income attributable to non-controlling interest |  | $    | (39,847     | ) |      | $
|Net loss attributable to controlling interest              |  | $    | (13,108,669 | ) |      | $



See
Notes to Financial Statements



4







INTRAOP MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

Years
Ended September 30, 2021 and 2020










|                                  |  |  | Convertible Preferred Stock |  |  |   | Common Stock |  |  | Additional Paid-in Capital |           |  | Accumulated Deficit |   |        | Non controlling Interest |  |   | Total Stockholders' Deficit
|--------------------------------- |  |  | --------------------------- |  |  | - | ------------ |  |  | -------------------------- | --------- |  | ------------------- | - | ------ | ------------------------ |  | - | ---------------------------
|                                  |  |  | Shares                      |  |  |   | Amount       |  |  |                            | Shares    |  |                     |   | Amount |                          |  |   |                            
|Balance, September 30, 2019       |  |  | 29,759,583                  |  |  | $ | 298          |  |  |                            | 1,450,212 |  |                     | $ | 15     |                          |  | $ | 31,473,204                 
|Issuance of common stock warrants |  |  | -                           |  |  |   | -            |  |  |                            | -         |  |                     |   | -      |                          |  |   | 82,673                     
|Stock-based compensation          |  |  | -                           |  |  |   | -            |  |  |                            | -         |  |                     |   | -      |                          |  |   | 3,095                      
|Net loss                          |  |  | -                           |  |  |   | -            |  |  |                            | -         |  |                     |   | -      |                          |  |   | -                          
|Balance, September 30, 2020       |  |  | 29,759,583                  |  |  | $ | 298          |  |  |                            | 1,450,212 |  |                     | $ | 15     |                          |  | $ | 31,558,972                 
|Exercise of stock options         |  |  | -                           |  |  |   | -            |  |  |                            | 181,250   |  |                     |   | 2      |                          |  |   | 7,242                      
|Stock-based compensation          |  |  | -                           |  |  |   | -            |  |  |                            | -         |  |                     |   | -      |                          |  |   | 10,447                     
|Net loss                          |  |  | -                           |  |  |   | -            |  |  |                            | -         |  |                     |   | -      |                          |  |   | -                          
|Balance, September 30, 2021       |  |  | 29,759,583                  |  |  | $ | 298          |  |  |                            | 1,631,462 |  |                     | $ | 17     |                          |  | $ | 31,576,661                 



See notes to financial statements.



5









INTRAOP MEDICAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended September 30, 2021 and 2020








|                                                                            |  | 2021 |             |   | 2020 |  
|--------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Cash flows from operating activities                                        |  |      |             |   |      |  
|Net loss                                                                    |  | $    | (13,148,516 | ) |      | $
|Adjustments to reconcile net loss to net cash used in operating activities: |  |      |             |   |      |  
|Depreciation                                                                |  |      | 1,859,224   |   |      |  
|Amortization of intangible assets                                           |  |      | 1,302,223   |   |      |  
|Payroll Protection Program loan forgiveness                                 |  |      | (493,600    | ) |      |  
|Stock-based compensation expense                                            |  |      | 10,447      |   |      |  
|Deferred tax expense                                                        |  |      | 13,408      |   |      |  
|Non-cash interest expense                                                   |  |      | 817,835     |   |      |  
|Change in fair value of derivative liability                                |  |      | 778,742     |   |      |  
|Changes in operating assets and liabilities Accounts receivable             |  |      | 1,146,427   |   |      |  
|Other receivable from sale leaseback                                        |  |      | -           |   |      |  
|Inventories                                                                 |  |      | (2,171,877  | ) |      |  
|Prepaid expenses and other current assets                                   |  |      | (76,416     | ) |      |  
|Property leased to others under operating leases                            |  |      | -           |   |      |  
|Deferred costs                                                              |  |      | -           |   |      |  
|Long-term deposits                                                          |  |      | -           |   |      |  
|Accounts payable                                                            |  |      | (44,686     | ) |      |  
|Accrued expenses                                                            |  |      | 3,322,510   |   |      |  
|Customer deposits                                                           |  |      | 35,276      |   |      |  
|Deferred revenue                                                            |  |      | (417,652    | ) |      |  
|Deferred profit on sale-leaseback                                           |  |      | 100,073     |   |      |  
|Deferred rent                                                               |  |      | (44,280     | ) |      |  
|Net cash used in operating activities                                       |  |      | (7,010,862  | ) |      |  
|                                                                            |  |      |             |   |      |  
|Cash flows from investing activities                                        |  |      |             |   |      |  
|Purchase of property and equipment                                          |  |      | (25,158)    |   |      |  
|Net cash used in investing activities                                       |  |      | (25,158)    |   |      |  
|                                                                            |  |      |             |   |      |  
|Cash flows from financing activities                                        |  |      |             |   |      |  
|Proceeds from related party convertible promissory notes                    |  |      | 2,500,000   |   |      |  
|Proceeds from loan payable                                                  |  |      | -           |   |      |  
|Proceeds from convertible promissory note                                   |  |      | 1,200,000   |   |      |  
|Proceeds from sale-leaseback                                                |  |      | 5,500,000   |   |      |  
|Repayments of capital lease                                                 |  |      | (3,149,209  | ) |      |  
|Proceeds from exercise of stock options                                     |  |      | 7,244       |   |      |  
|Net cash provided by financing activities                                   |  |      | 6,058,035   |   |      |  
|Net increase in cash, cash equivalents and restricted cash                  |  |      | (977,985    | ) |      |  
|Cash, cash equivalents and restricted cash, beginning of year               |  |      | 5,056,845   |   |      |  
|Cash, cash equivalents and restricted cash, end of year                     |  | $    | 4,078,860   |   |      | $
|Supplemental disclosure of cash flow information                            |  |      |             |   |      |  
|Cash paid for interest                                                      |  | $    | 1,038,919   |   |      | $
|Cash paid for income taxes                                                  |  | $    | 800         |   |      | $
|Supplemental disclosure of non-cash financing activities                    |  |      |             |   |      |  
|Issuance of warrant in connection with sale-leaseback                       |  | $    | -           |   |      | $



See notes to financial statements.



6







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 1 – DESCRIPTION OF BUSINESS



IntraOp Medical Corporation (the “Company”),
originally incorporated in Delaware in 2013, is a medical device company providing intraoperative radiation to ailing cancer patients.



IntraOperative Electron Radiation Therapy
(“IOERT”) is the administration of radiation while a patient is undergoing cancer surgery. The radiation is delivered as part
of the surgical procedure directly to a specified area (i.e. any residual breast tumor), while the surrounding healthy tissue is moved
aside, when possible. The IOERT is delivered through a device called Mobetron. Mobetron is the intraoperative device sold by the Company.
The Company is subject to a number of risks associated with companies at a similar stage including dependence on insurance companies,
dependence on a few customers, competition from substitute services and larger competitors.



In April 2016, the Company established
a wholly owned subsidiary, IntraOp Europe GmbH, in Germany.



In December 2018, the Company entered into
a joint venture with El Seif Holding UK Limited (El Seif) to form IntraOp UK Ltd (the JV), incorporated in England and Wales. Ownership
is 50/50. The initial investment was 4,000,000 Great British Pounds (GBP) of which 1,000,000 was paid by the Company and 3,000,000 was
paid by El Seif Holding UK Limited. The JV will be the exclusive distributor of the Company in the UK. The Company evaluated the JV and
determined that consolidation of the JV was the proper treatment in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”), as the JV qualifies as a Variable Interest Entity (VIE) for which the Company was determined
to be the primary beneficiary. In connection with its investment in the JV, the Company recorded a bargain purchase gain of $651,986 representing
the difference between its investment amount of 1 million GBP and its 50% share of the equity of the JV at formation. Included in the
non-controlling interest of El Seif is a 1 million GBP non-voting interest with priority in liquidation over the common shares. The consolidated
financial statements include the financial statements of the joint venture.



7







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 2 – GOING CONCERN



As shown in the accompanying consolidated
financial statements, the Company has suffered operating losses and negative cash flows from operations and as of September 30, 2021,
had an accumulated deficit of $67,388,605. The Company is dependent upon continued equity or debt financing to continue as a going concern
until such time as it can generate sufficient revenues and cash flows from operations.



Management’s plans in regard to this
matter consist principally of securing additional debt or equity funding combined with planned improvements in cash flows from operations
through revenue growth and cost controls. The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.



On March 11, 2020, the World Health Organization
declared the COVID-19 outbreak to be a pandemic. The disruption resulting from the COVID-19 pandemic is currently expected to be temporary,
but there is considerable uncertainty around the duration and the Company expects this matter may negatively impact its operating results.
However, the related financial impact and duration cannot be reasonably estimated at this time.



On March 27, 2020, the Coronavirus Aid,
Relief, and Economic Security (CARES) Act was signed into law and includes changes to the Internal Revenue Code for refundable payroll
tax credits, deferment of employer payments for social security tax, net operating loss carryback periods, alternative minimum tax credits,
net interest deduction limitations, and depreciation of certain leasehold improvements.



NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Basis of Presentation

The accompanying consolidated financial
statements have been prepared on an accrual basis in accordance with accounting principles generally accepted in the United States of
America (“GAAP”).



Reclassifications

Certain prior year amounts have been reclassified in order
to conform to the current year presentation. These reclassifications had no effect on the previously reported net loss.



Use of Estimates

The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Company’s most significant estimates relate to: (i) the valuation of its common stock,
stock options and warrants, (ii) derivative liabilities, (iii) inventory valuation, (iv) accrual for warranty obligations and

(v) the
valuation of acquired assets, including goodwill and intangibles.



8







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Consolidation

The consolidated financial statements
include the financial statements of IntraOp Medical Corporation, its wholly owned subsidiary IntraOp Europe GmbH, and the joint venture
IntraOp UK Ltd. All significant intercompany transactions and balances have been eliminated in consolidation.



Foreign Currency

The functional currency of IntraOp Europe
GmbH and IntraOp UK Ltd is the U.S. Dollar. Foreign currency transaction gains and losses are the result of exchange rate changes on transactions
denominated in currencies other than the functional currency. Monetary balances are remeasured at year end exchange rates and non-monetary
balances are remeasured at historical exchange rates. Revenues and expenses are translated at the average rates of exchange prevailing
during the year. Remeasurement and foreign currency transaction gains/(losses) of

$25,692 and $287,665 for the years ended
September 30, 2021 and 2020, respectively, are included in other income (expense), net, in the accompanying consolidated statements of
operations.



Cash and Cash Equivalents

The Company considers
all highly liquid investments with maturities of three (3) months or less from the date of purchase to be cash equivalents. The carrying
amount of cash and cash equivalents approximates its fair value.



Restricted Cash

At September 30, 2021 and 2020, the Company
had restricted cash of $44,190 and $44,168, respectively, which consisted of cash deposited in a money market account held to secure the
Company’s credit card for both years.



Stock-based Compensation

Stock-based compensation cost for stock
options is measured at the grant date based on the fair value of the award, determined using the Black-Scholes option pricing model, and
is recognized as expense over the applicable vesting period of the stock award using the straight- line method for awards that are expected
to vest.



Concentrations of Credit Risk

Financial instruments that potentially
subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are
deposited with federally insured commercial banks and cash balances may be in excess of federal insurance limits. Management believes
that the financial risks associated with its cash and cash equivalents are minimal as the Company’s cash deposits are held at creditworthy
commercial banks.



9







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Concentrations of Credit Risk (Continued)

The Company generally does not require
collateral or other security in support of accounts receivable and does not charge interest on past due balances. The Company performs
ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts to ensure trade receivables are not overstated
due to uncollectibility. Allowances are provided for individual accounts receivable when the Company becomes aware of a customer’s
inability to meet its financial obligations, such as in the case of bankruptcy, deterioration in the customer’s operating results
or change in financial position. If circumstances related to customers change, estimates of the recoverability of receivables are further
adjusted. The Company also considers broader factors in evaluating the sufficiency of its allowances for doubtful accounts, including
the length of time receivables are past due, macroeconomic conditions, significant one-time events and historical experience. The Company
charges off uncollectible accounts receivable once all efforts to collect have been exhausted. As of September 30, 2021 and 2020, there
was no allowance for doubtful accounts.



The Company’s product revenues consist
principally of Mobetron systems and related service and maintenance sold principally to hospitals and doctors’ offices, throughout
the United States, Europe, Middle East and Southeast Asia.



Accounts receivable from four customers
totaled approximately 24%, 21%, 18% and 13% of total accounts receivable at September 30, 2021. Sales to three customers accounted for
approximately 21%, 19% and 13% of total revenues for the year ended September 30, 2021.



Accounts receivable from two customers
totaled approximately 45% and 20% of total accounts receivable at September 30, 2020. Sales to four customers accounted for approximately
15%, 14%, 14% and 11% of total revenues for the year ended September 30, 2020.



Inventories

Inventories are stated at the lower of
cost or net realizable value, using a standard cost method. The Company periodically reviews its inventories for potential slow-moving
or obsolete items and writes down specific items to net realizable value as appropriate. During 2021 and 2020, the Company had zero write-offs
for excess and obsolete items, respectively.



Property and Equipment

Property and equipment are stated at historical
cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets,
generally two to seven years. Leasehold improvements are amortized using the straight- line method over the shorter of the estimated useful
lives of the assets or the term of the leases. Upon retirement or sale, the cost of assets disposed, and the related accumulated depreciation
are removed from the accounts and the resulting gain or loss is reflected in the consolidated statements of operations and comprehensive
loss. Expenditures for repairs and maintenance are charged to expense as incurred.



10







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Property and Equipment (Continued)

The Company leases its equipment to certain
customers. The costs related to this leased equipment are deferred and as the residual value of the equipment exceeds the cost no depreciation
has been recorded. The leased equipment is included in property leased to others under operating leases in the consolidated balance sheets.



Accounting for Impairment of Long-lived
Assets

Long-lived assets, such as property and
equipment, leased assets and intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an asset exceeds estimated future net
cash flows associated with the asset, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds
the fair value of the asset. No such impairments have been identified during the years ended September 30, 2021 and 2020.



Intangible Assets

Intangible assets with finite lives are
amortized to expense over their useful lives of seven to ten years. The Company’s identified intangible assets consist of developed
technology, customer relationships and trade name which are being amortized using the straight-line method.



Goodwill

Goodwill is not amortized but is tested
for impairment on an annual basis or earlier if events occur or changes in circumstances indicate that the carrying amount of goodwill
may not be recoverable. No such impairments have been identified to date.



Research and Development

Research and development costs are charged to operations as
incurred.



Income Taxes

The Company accounts for income taxes
using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated
future tax effects of differences between the financial statement and income tax basis of assets and liabilities. In addition, deferred
tax assets are recorded for the future benefit of utilizing net operating loss and tax credit carryovers. Deferred tax assets and liabilities
are measured using the enacted tax rates applied to taxable income. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided against the Company’s
deferred income tax assets when it is more likely than not that the asset will not be realized.



11







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Income Taxes (Continued)

Significant judgment is required in determining
any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, the Company considers all
available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies.
In the event that the Company changes its determination as to the amount of deferred tax assets that is more likely than not to be realized,
the Company will adjust its valuation allowance with a corresponding impact to the provision for income taxes in the period in which such
determination is made.



The Company follows authoritative guidance
regarding uncertain tax positions. This guidance requires that realization of an uncertain income tax position must be more likely than
not (i.e., greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. The guidance further
prescribes the benefit to be realized assumes a review by tax authorities having all relevant information and applying current conventions.
The guidance also prescribes the financial statement classification of tax related penalties and interest and sets forth disclosures regarding
unrecognized tax benefits. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits as income
tax expense. As of September 30, 2021 and 2020. The Company has not identified any material uncertain tax positions.



Fair Value Measurement

The Company determines the fair value
of financial assets and liabilities using the fair value hierarchy established in the accounting standards.



The hierarchy describes three levels of
inputs that may be used to measure fair value, as follows:



Level 1 –Observable inputs that
reflect quoted prices in active markets for identical assets and liabilities.

Level 2 –Includes other inputs
that are directly or indirectly observable in the marketplace.

Level 3 –Unobservable inputs that are supported by little
or no market activity.



The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company’s
only financial asset carried at fair value in these financial statements is the bifurcated embedded conversion derivative liability. The
fair value is based upon Level 3 inputs.



A schedule of the activity for the derivative
liability and discussion of the valuation approach and assumptions is included in Note 5.



12







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Revenue Recognition

The Company recognizes revenue through the application of the
following the five steps:



(1) Identification of the contract
with a customer, which is typically a purchase order or signed agreement;

(2) Identification of the
performance obligations in the contract;

(3) Determination of the transition
price;

(4) Allocation of the transaction
price to the performance obligations; and

(5) Recognition of revenue when (or
as) each performance obligation is satisfied.



Below are the typical performance obligations and their revenue
recognition method.



Sales of Mobetron systems and accessories
are recognized at a point in time, upon delivery of the products. System sales are typically invoiced 20% upfront, 70% upon delivery and
10% within a couple weeks of delivery.



Maintenance and service contracts are typically
invoiced annually or quarterly and recognized over time, ratably over the term of the contract. Amounts invoiced in advance of revenue
recognition are recorded as deferred revenue in the accompanying consolidated balance sheets.



Customer deposits are recorded as a liability
and recognized as revenue upon delivery of the product.



Rental revenue for leased Mobetron systems
is typically invoiced quarterly or monthly and is recognized over time, ratably over the lease term.



During the years ended September 30, 2021 and 2020, the Company
recognized the following:



|                                 |  | 2021 |           |  | 2020 |  
|-------------------------------- |  | ---- | --------- |  | ---- | -
|Point in time revenue recognized |  | $    | 4,300,164 |  |      | $
|Over time revenue recognized     |  |      | 2,893,253 |  |      |  
|Total revenue recognized         |  | $    | 7,193,417 |  |      | $



13







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Warranty

The warranty periods for the Company’s
products are generally one year from the date of shipment. The Company is responsible for warranty obligations arising from its sales
and provides for an estimate of its warranty obligation at the time of sale. Management estimates and provides a reserve for warranty
upon sale of a new system based upon historical warranty repair expenses on the Company’s installed base. The warranty accrual is
included in accrued expenses in the accompanying consolidated balance sheets.



Advertising

The Company expenses the costs of advertising, including promotional
expenses, as incurred. Advertising expense for the years ended September 30, 2021 and 2020 was not material.



Sales Taxes

Sales taxes collected from customers and remitted to governmental
authorities are not included in revenue.



Recent Accounting Pronouncements

In February 2016, the FASB issued ASU
2016-02, “Leases (Topic 842)”. The guidance in this update supersedes the leasing guidance in Topic 840, Leases. Under the
new guidance, lessees are required to recognize lease assets and lease liabilities in the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition
in the income statement. The new standard is effective for annual periods beginning after December 15, 2021, including interim periods
within those fiscal year. A modified retrospective transition approach is required for lessees for capital and operating leases existing
at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain
practical expedients available. Management is currently evaluating the new standard.



In June 2016, the FASB issued ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which creates a new
credit impairment standard for financial assets measured at amortized cost and available-for-sale debt securities. The ASU requires financial
assets measured at amortized cost (including loans, trade receivables and held-to-maturity debt securities) to be presented at the net
amount expected to be collected, through an allowance for credit losses that are expected to occur over the remaining life of the asset,
rather than incurred losses. The ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather
than as a direct write-down. The measurement of credit losses for newly recognized financial assets (other than certain purchased assets)
and subsequent changes in the allowance for credit losses are recorded in the statement of income as the amounts expected to be collected
change. The ASU is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted. Management is currently
evaluating the new standard.



14







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)



Recent Accounting Pronouncements
(Continued)

In August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This
ASU removes, modifies and adds certain disclosure requirements of ASC Topic 820. The ASU is effective for all entities for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2019. Management adopted this standard effective October 1,
2020 and the impact of adoption was not significant to the consolidated financial statements.



In October 2021, the FASB issued ASU 2021-07,
Compensation– Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified
Share-Based Awards,which will allow nonpublic entities that issue equity-classified share-based awards to elect a practical expedient
to determine the current price input of equity-classified share-based awards issued to both employees and nonemployees using the reasonable
application of a reasonable valuation method. The practical expedient describes the characteristics of the reasonable application of a
reasonable valuation method including (1) the date on which a valuation’s reasonableness is evaluated, (2) the factors that a reasonable
valuation should consider, (3) the scope of information that a reasonable valuation should consider, and (4) the criteria that should
be met for the use of a previously calculated value to be considered reasonable. The same characteristics are used in the regulations
of the U.S. Department of the Treasury related to Section 409A of the U.S. Internal Revenue Code (the Treasury Regulations) to describe
the reasonable application of a reasonable valuation method for income tax purposes. A reasonable valuation performed in accordance with
the Treasury Regulations is an example of a way to achieve the practical expedient. The practical expedient in this Update is effective
prospectively for all qualifying awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods
within fiscal years beginning after December 15, 2022. Early application, including application in an interim period, is permitted for
financial statements that have not yet been issued or made available for issuance as of October 25, 2021. Management is currently evaluating
the new standard.



NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS



|Inventories
    Inventories consisted of the following at September 30,: | 
|------------------------------------------------------------------------ | 



|                |  | 2021 |           |  | 2020 |  
|--------------- |  | ---- | --------- |  | ---- | -
|Raw materials   |  | $    | 184,441   |  |      | $
|Work in process |  |      | 346,339   |  |      |  
|Finished goods  |  |      | 392,559   |  |      |  
|Software        |  |      | 211,531   |  |      |  
|Total           |  | $    | 1,134,870 |  |      | $



15









INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS (Continued)



Property and Equipment

Property and equipment consisted of the following at September
30,:



|                              |  | 2021 |            |   | 2020 |  
|----------------------------- |  | ---- | ---------- | - | ---- | -
|Computers and equipment       |  | $    | 280,770    |   |      | $
|Furniture and fixtures        |  |      | 60,363     |   |      |  
|Leased equipment              |  |      | 7,635,000  |   |      |  
|                              |  |      | 7,976,133  |   |      |  
|Less accumulated depreciation |  |      | (2,582,539 | ) |      |  
|Property and equipment, net   |  | $    | 5,393,594  |   |      | $



Property leased to others under operating
leases totaled $2,079,153 and $1,606,884 at September 30, 2021 and 2020, respectively. At September 30, 2021 and 2020, there were three
and two leased Mobetron systems.



During 2021, the Company leased
three systems to customers and recognized $435,663 rental income. Under the terms of one agreement, the lessee pays monthly rental
fees of $30,000 for a two-year term. Under the terms of another agreement, the lessee pays monthly rental fees of $30,100 for a
one-year term, however during the year, the Company issued credit memos totaling $180,600, reversing rental income due to the
special circumstances related to the COVID-19 pandemic. Under the terms of another agreement, the lessee pays quarterly rental fees
of 36,299 Euro.



During 2020, the Company leased two
systems to customers and recognized $420,200 rental income. Under the terms of one agreement, the lessee pays monthly rental fees of
$30,000 for a two-year term. Under the terms of another agreement, the lessee pays monthly rental fees of $30,100 for a one-year
term, however during the year, the Company issued a credit memo totaled $60,200, reversing rental income due to the special
circumstances related to the COVID-19 pandemic.



16











INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS (Continued)



Intangible Assets

The gross amount of intangible assets and related amortization
were as follows as of September 30, 2021:



|                       |  | Gross 
Carrying Amount |            |  | Estimated Useful Life (Years) |  |    | Accumulated Amortization |  |   | Carrying Value | 
|---------------------- |  | ---------------------- | ---------- |  | ----------------------------- |  | -- | ------------------------ |  | - | -------------- | 
|Developed technology   |  | $                      | 11,000,000 |  |                               |  | 9  |                          |  | $ | 9,777,776      | 
|Customer relationships |  |                        | 1,000,000  |  |                               |  | 7  |                          |  |   | 1,000,000      | 
|Trade name             |  |                        | 800,000    |  |                               |  | 10 |                          |  |   | 640,000        | 
|                       |  | $                      | 12,800,000 |  |                               |  |    |                          |  | $ | 11,417,776     | 



The gross amount of intangible assets and related amortization
were as follows as of September 30, 2020:



|                       |  | Gross 
Carrying Amount |            |  | Estimated 
Useful Life (Years) |  |    | Accumulated Amortization |  |   | Carrying Value | 
|---------------------- |  | ---------------------- | ---------- |  | ------------------------------ |  | -- | ------------------------ |  | - | -------------- | 
|Developed technology   |  | $                      | 11,000,000 |  |                                |  | 9  |                          |  | $ | 8,555,553      | 
|Customer relationships |  |                        | 1,000,000  |  |                                |  | 7  |                          |  |   | 1,000,000      | 
|Trade name             |  |                        | 800,000    |  |                                |  | 10 |                          |  |   | 560,000        | 
|                       |  | $                      | 12,800,000 |  |                                |  |    |                          |  | $ | 10,115,553     | 



Future amortization expense for these assets is as follows:



|For the Years Ending September 30, |       |  |  |  
|---------------------------------- | ----- |  |  | -
|                                   | 2022  |  |  |  
|                                   | 2023  |  |  |  
|                                   | Total |  |  | $



17







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 4 – SIGNIFICANT BALANCE SHEET COMPONENTS (Continued)



|Accrued Expenses
    Accrued expenses consisted of the following at September 30,: | 
|---------------------------------------------------------------------------------- | 



|                             |  | 2021 |           |  | 2020 |  
|---------------------------- |  | ---- | --------- |  | ---- | -
|Employee related liabilities |  | $    | 257,389   |  |      | $
|Warranty accrual             |  |      | 180,000   |  |      |  
|Accrued interest             |  |      | 6,758,034 |  |      |  
|Other accrued liabilities    |  |      | 457,595   |  |      |  
|Accrued expenses             |  | $    | 7,653,018 |  |      | $



NOTE 5 – FINANCING ARRANGEMENTS



Related Party Notes Payable

In February 2014, the Company issued a
$3,000,000 secured promissory note payable to an investor with an annual interest rate of 8%. This investor holds a majority of the outstanding
convertible preferred stock of the Company. As amended, principal and interest payments were due in February 2020. In February 2017, the
Company issued an additional $2,000,000 secured promissory note payable to the same investor with an annual interest rate of 8% that originally
matured in February 2020. These notes require interest-only payments until the maturity date. In February 2020, the maturity dates for
these notes were extended to June 2020. In June 2020, the maturity date was extended to December 2020. In December 2020, the maturity
date was extended to December 2021. In November 2021, the maturity date was further extended to December 2022. The balance of the notes
at September 30, 2021 and 2020 was $5,000,000 for both years. Interest expense for the years ended September 30, 2021 and 2020 was $400,000
for both years.



Related Party Convertible Notes Payable

In December 2018, all previously outstanding
convertible notes payable were consolidated into one convertible promissory note with a principal balance of $10,961,129. In July 2019,
the Company issued another convertible promissory note of $1,300,000.



During the year ended September 30, 2021,
the Company issued the following additional convertible promissory notes:



| | April 2021     |  |  | $ | 1,000,000 | 
| | -------------- |  |  | - | --------- | 
| | June 2021      |  |  |   | 500,000   | 
| | July 2021      |  |  |   | 500,000   | 
| | September 2021 |  |  |   | 500,000   | 
| | Total          |  |  | $ | 2,500,000 | 



18







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 5 – FINANCING ARRANGEMENTS (Continued)



Related Party Convertible Notes Payable
(Continued)

These convertible promissory notes all
have an annual interest rate of 15%. The principal and accrued interest were due in June 2020. In June 2020, the maturity date was extended
to December 2020. In December 2020, the maturity date was extended to December 2021. In November 2021, the maturity date was further extended
to December 2022. The holder of the note has the option to convert the outstanding principal into the Series A-2 preferred stock or securities
to be issued in the next round of financing. If the outstanding balance is converted to shares of Series A-2, the shares would equate
to the loan balance divided by the Series A- 2 issue price. If the loan balance is converted into securities from the next round of financing,
the number of shares would equate to the outstanding loan balance divided by 80% of the price per share of the next round price.



The principal balance of the convertible
promissory notes at September 30, 2021 and 2020 was $18,911,129 and $16,411,129, respectively. Interest expense for the years ended September
30, 2021 and 2020 was $4,392,923 and $2,345,887, respectively.



The conversion feature in these notes
is being accounted for as a derivative liability (and a related debt discount which is being amortized to interest expense over the term
of the notes) and was revalued at the expected settlement value at each reporting period. Activity for the derivative liability is as
follows:



|Value at September 30, 2019 |  | $ | 3,383,537 | 
|--------------------------- |  | - | --------- | 
|Additional notes            |  |   | 1,037,500 | 
|Change in value             |  |   | 586,472   | 
|Value at September 30, 2020 |  |   | 5,007,509 | 
|Additional notes            |  |   | 625,000   | 
|Change in value             |  |   | 779,975   | 
|Value at September 30, 2021 |  | $ | 6,412,484 | 



The derivative liability is being measured
at fair value which is based upon the expected future settlement amount based upon the expected predominate settlement mechanism in the
convertible notes, which is conversion into a qualified financing at a 20% discount. Given the short time to maturity of the convertible
notes payable, the Company has not discounted the estimated future settlement amounts.



All of the related party notes are secured
by a first priority security interest on all assets including cash, intangibles, fixed assets, inventory and accounts receivable.



19







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 5 – FINANCING ARRANGEMENTS (Continued)



Convertible Promissory Note

In September 2020,
the Company issued a $1,500,0000 convertible promissory note at an annual interest rate of 10% with a maturity date of September 18, 2025.
The note is secured by a Mobetron system. The holder of the note has the option to convert the outstanding principal into securities to
be issued in the next round of financing, where the number of shares would equate to the outstanding loan balance divided by 80% of the
price per share of the next round price.



In November 2020, the Company issued a
$1,200,0000 convertible promissory note at an annual interest rate of 10% with a maturity date of November 18, 2025. The note is secured
by a Mobetron system. The holder of the note has the option to convert the outstanding principal into securities to be issued in the next
round of financing, where the number of shares would equate to the outstanding loan balance divided by 80% of the price per share of the
next round price.



The conversion feature in these notes is
accounted for as a derivative liability (and a related debt discount which is being amortized to interest expense over the term of the
notes) and is revalued at the expected settlement value at each reporting period. Activity for the derivative liability is as follows:



|At issuance                 |  | $ | 375,000 |  
|--------------------------- |  | - | ------- | -
|Change in value             |  |   | 1,232   |  
|Value at September 30, 2020 |  |   | 376,232 |  
|Additional note             |  |   | 300,000 |  
|Change in value             |  |   | (1,232  | )
|Value at September 30, 2021 |  | $ | 675,000 |  



Loan payable

In April 2020, the Company received a
Payroll Protection Program (“PPP”) loan for $493,600. In January 2021, the loan was forgiven in full.



Capital Leases/Sale Leasebacks

The Company enters into sale leaseback
agreements to sell units of its equipment and then leases back the equipment. A summary of capital lease/sale leaseback transactions are
as follows:



20







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 5 – FINANCING ARRANGEMENTS (Continued)



Capital Leases/Sale Leasebacks (Continued)



|Date Entered   | Amount     | Term          | Interest Rate | Monthly Lease
    Payments | Warrants Issued                                                                                                                                                                             | Date Repurchased               
|-------------- | ---------- | ------------- | ------------- | -------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------
|June 2018      | $1,500,000 | 60
    months | 15%           | $30,000                    | 750,000 shares of common stock at an exercise price of
    $0.40 per share which expires in September 2025, of which 375,000 were immediately vested and 375,000 vests over a 60-month term | N/A                            
|March 2019     | $1,500,000 | 36
    months | 10%           | $42,475                    | 562,500 shares of common stock at an exercise price of
$0.40 per share which expires in March 2026                                                                                          | June 2019 and November
    2019
|April 2019     | $750,000   | 36
    months | 10%           | $21,238                    | September 2020                                                                                                                                                                             
|June 2019      | $1,500,000 | 36
    months | 10%           | $42,475                    | 187,500 shares of common stock at an exercise price of
$0.40 per share which expires in June 2026                                                                                           | October 2020 and June 2021     
|September 2019 | $635,000   | 36
    months | 10%           | $17,981                    | 157,750 shares of common stock at an exercise price of
$0.40 per share which expires in September 2026                                                                                      | N/A                            
|October 2019   | $750,000   | 36
    months | 10%           | $21,238                    | N/A                                                                                                                                                                                         | May 2020                       



21







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 5 – FINANCING ARRANGEMENTS (Continued)



Capital Leases/Sale Leasebacks (Continued)



|Date Entered      | Amount     | Term          | Interest Rate | Monthly Lease
    Payments                                      | Warrants Issued                                                                                       | Date Repurchased
|----------------- | ---------- | ------------- | ------------- | --------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ----------------
|November
    2019 | $750,000   | 36
    months | 10%           | $21,238                                                         | N/A                                                                                                   | October 2020    
|December 2019     | $750,000   | 36
    months | 10%           | $21,238                                                         | 187,500 shares of common stock at an exercise price of
$0.4 per share which expires in December 2026  | January 2021    
|September 2020    | $750,000   | 42
    months | 10%           | $21,238                                                         | 187,500 shares of common stock at an exercise price of
$0.4 per share which expires in September 2027 | June 2021       
|November 2020     | $1,500,000 | 34
    months | 10%           | $21,238                                                         | 375,000 shares of common stock at an exercise price of
$0.4 per share which expires in November 2027  | N/A             
|August 2021       | $1,500,000 | 42
    months | 10%           | $21,238                                                         | 375,000 shares of common stock at an exercise price of
$0.4 per share which expires in August 2028    | N/A             
|January 2021      | $2,500,000 | 60
    months | 10%           | Interest payments ranging from approximately
$19,178 to $21,233 | N/A                                                                                                   | N/A             



22







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 5 – FINANCING ARRANGEMENTS (Continued)



Capital Leases/Sale Leasebacks (Continued)

Interest expense for all these capital lease/sale leaseback
transactions was $609,638 and

$492,722 for the years ended September 30, 2021 and 2020, respectively.
Deferred profit activity for all these sale leaseback transactions are as follows:



|Balance at September 30, 2019 |  | $ | 2,116,444  |  
|----------------------------- |  | - | ---------- | -
|Additions                     |  |   | 1,376,564  |  
|Adjustments for repurchases   |  |   | (224,174   | )
|Profit on sale leaseback      |  |   | (1,636,048 | )
|Balance at September 30, 2020 |  |   | 1,632,786  |  
|Additions                     |  |   | 2,957,626  |  
|Adjustments for repurchases   |  |   | (294,611   | )
|Profit on sale leaseback      |  |   | (1,449,057 | )
|Balance at September 30, 2021 |  | $ | 2,846,744  |  



Warrants issued in connection with
these transactions, which include those immediately vested and those that vest over 60 months, were accounted for as a payment
against the lease and recorded to equity. The calculated fair value of the warrants was $129,002 for the March 2019 warrants,
$42,370 for the June 2019 warrants, $35,560 for the September 2019 warrants, $42,107 for the December 2019 warrants, $40,566 for the
September 2020 warrants, $32 for the November 2020 warrants, and $31 for the August 2021 warrants estimated using the Black- Scholes
model with the following assumptions (As the value of the September 2020 and November 2020 warrants were insignificant, they were
not recorded):



23







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 5 – FINANCING ARRANGEMENTS (Continued)



Capital Leases/Sale Leasebacks (Continued)



|                             |  | March 2019 |      |   | June 2019 |  |      | September 2019 |  |  | December 2019 |   |  | September 2020 |     
|---------------------------- |  | ---------- | ---- | - | --------- |  | ---- | -------------- |  |  | ------------- | - |  | -------------- | ----
|Expected dividend yield (1)  |  |            | 0    | % |           |  | 0    | %              |  |  | 0             | % |  |                | 0   
|Risk-free interest rate (2)  |  |            | 2.49 | % |           |  | 1.96 | %              |  |  | 1.65          | % |  |                | 1.74
|Expected volatility (3)      |  |            | 55   | % |           |  | 55   | %              |  |  | 55            | % |  |                | 55  
|Expected life (in years) (4) |  |            | 7    |   |           |  | 7    |                |  |  | 7             |   |  |                | 7   



|                             |  | November 2020 |      |   | August 2021 | 
|---------------------------- |  | ------------- | ---- | - | ----------- | 
|Expected dividend yield (1)  |  |               | 0    | % |             | 
|Risk-free interest rate (2)  |  |               | 1.05 | % |             | 
|Expected volatility (3)      |  |               | 60   | % |             | 
|Expected life (in years) (4) |  |               | 7    |   |             | 



| | (1) | The Company has no history or expectation of paying cash dividends
on its common stock.
| | --- | ---------------------------------------------------------------------------------------

| | (2) | The risk-free interest rate is based on the U.S. Treasury yield
for a term consistent with the expected life of the awards in effect at the time of grant.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The Company has estimated the expected volatility of its share
price based on the share price volatility of similar publicly traded entities.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | The expected life represents the contractual term of the warrant.
| | --- | -----------------------------------------------------------------



24







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 5 – FINANCING ARRANGEMENTS (Continued)



Capital Leases/Sale Leasebacks (Continued)

Following are the future minimum lease payments for the capital
leases as of September 30,:



|2022                                |  |  | $ | 1,845,180  |  
|----------------------------------- |  |  | - | ---------- | -
|2023                                |  |  |   | 1,664,374  |  
|2024                                |  |  |   | 1,100,190  |  
|2025                                |  |  |   | 447,984    |  
|2026                                |  |  |   | 2,571,233  |  
|Total                               |  |  | $ | 7,628,961  |  
|Less interest                       |  |  |   | (1,582,144 | )
|Total                               |  |  | $ | 6,046,817  |  
|Less current portion                |  |  |   | (3,781,164 | )
|Capital lease obligation, long term |  |  | $ | 2,265,653  |  



NOTE 6 – STOCKHOLDERS’ DEFICIT



Common Stock

As of September 30, 2021 and 2020, the
Company was authorized to issue 55,000,000 shares of common stock, all with a par value of $0.00001 per share.



Convertible Preferred Stock

The convertible preferred stock as of September 30, 2021 and
2020, consisted of the following:



|           |  | Number of
 Shares Authorized |            |  | Number of
 Shares
 Issued and Outstanding |  |            | Total
 Liquidation Preference | 
|---------- |  | ---------------------------- | ---------- |  | ----------------------------------------- |  | ---------- | ----------------------------- | 
|Series C   |  |                              | 30,944,765 |  |                                           |  | 26,856,187 |                               | 
|Series A-2 |  |                              | 16,403,396 |  |                                           |  | 2,903,396  |                               | 
|           |  |                              | 47,348,161 |  |                                           |  | 29,759,583 |                               | 



As of September 30, 2021, the rights and
preferences, privileges and restrictions of the Series C and A-2 Convertible Preferred Stock are set forth in the Company’s Amended
and Restated Articles of Incorporation and are summarized as follows:



25







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)



Convertible Preferred Stock (Continued)

Dividends Provisions

The holders of shares of Series C and
A-2 Convertible Preferred Stock shall be entitled to receive dividends when, as and if declared by the board of directors, prior and in
preference to any declaration or payment of any dividend or distribution on the Common Stock or any other junior equity security of the
Company, at the rate of 8% of the original Series C and A-2 base price, adjustable for certain events, such as stock splits and combinations.
The Company has not declared dividends to date.



After such dividends to the holders of
the Series C and A-2 Convertible Preferred Stock, any additional dividends or distributions shall be distributed among all holders of
Common Stock and Convertible Preferred Stock in proportion to the number of shares of Common Stock that would be held by each such holder
if all shares of Convertible Preferred Stock were converted to Common Stock at the then effective Conversion Ratio.



Redemption Provisions

The Convertible Preferred Stock is not
redeemable at the option of the holder.



Liquidation Preference

In the event of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary, the holders of the Series C Convertible Preferred Stock shall be entitled
to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of the Series A-2 and Common
Stock or other junior equity securities of the Company by reason of their ownership thereof, an amount per share equal to the Series C
Issue Price times 1.25 plus all dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared
but unpaid thereon. Holders of Series A-2 are entitled to an amount per share equal to Series A-2 Issue Price plus all dividends accrued
but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon. If upon the occurrence of
such event, the assets and funds thus distributed among the holders of the Series A-2 and C Convertible Preferred Stock shall be insufficient
to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the Company legally
available for distribution shall be distributed ratably among the holders of the Series A-2 and C Convertible Preferred Stock in proportion
to the full preferential amount that each such holder is otherwise entitled to receive.



26







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 6 – STOCKHOLDERS’ DEFICIT (Continued)



Convertible Preferred Stock (Continued)

Conversion

Each share of Convertible Preferred Stock
shall be convertible at the option of the holder thereof, at any time after the date of issuance of such share, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing the outstanding amount of the Original Series C and A-2 Issue
Price by the Series C and A-2 conversion price (initially

$0.8436 and $1.00, respectively).



Each share of Series C and A-2 shall be
converted into fully-paid, nonassessable shares of Common Stock at the then effective Preferred conversion price immediately prior to
the closing of a firm commitment underwritten public offering pursuant to an effective registrant statement filed under the Securities
Act of 1933, covering the offer and sale of Common Stock provided that a) the public offering price is at least $4.218 per share of Common
Stock, b) the aggregate gross proceeds to the Corporation are not less than $50,000,000 and c) the Common Stock of the Corporation is
listed for quotation on the NYSE or NASDAQ stock market.



The conversion price is subject to adjustment
for stock splits, recapitalizations, reorganizations and other equity restructuring transactions. Additionally, the conversion price is
subject to the adjustment based upon future dilutive issuances at a price less than the Preferred conversion price.



Voting Rights

The holder of each share of Preferred
Stock shall have the right to one vote for each share of Common Stock into which such Preferred Stock could be converted on the record
date for the vote or consent of stockholders, and, except as otherwise required by law, with respect to such vote, such holder shall have
full voting rights and powers equal to the voting rights and powers of the holders of Common Stock.



NOTE 7 – STOCK-BASED COMPENSATION



The Company has adopted the 2013 Stock
Plan under which it originally reserved 4,350,636 shares for grants of awards. An additional 3,719,364 shares were reserved in May 2016
under the amended plan, bringing the total shares reserved to 8,070,000.



The Option Plan provides for the grant
of incentive and non-statutory stock options to employees, nonemployee directors and consultants of the Company. Options granted under
the Option Plan generally become exercisable ratably over a four-year period following the date of grant and expire ten years (five years
for incentive and non-statutory stock options granted to holders of 10% or more of the voting stock) from the date of grant. At the discretion
of the Company’s Board of Directors, certain options may be exercisable immediately at the date of grant but subject to repurchase
at their original exercise price in the event of an employee’s termination prior to full vesting. All other options are exercisable
only to the extent vested.



27









INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 7 – STOCK-BASED COMPENSATION (Continued)



The exercise price of both incentive and
non-statutory stock options granted under the Option Plan must be at least equal to 100% of the fair value of the Company’s common
stock at the date of grant, as determined by the Board of Directors. Incentive and non-statutory stock options granted to stockholders
who own greater than 10% of the Company’s outstanding stock at the date of grant must be issued at no less than 110% of the estimated
fair value of the common stock on the date of grant.



Stock option activity for the years ended
September 30, 2021 and 2020 was as follows:





|                                  |  | Shares |           |   | Weighted- average exercise price per share |   |       | Weighted- average remaining contractual life (in years) | 
|--------------------------------- |  | ------ | --------- | - | ------------------------------------------ | - | ----- | ------------------------------------------------------- | 
|Outstanding at September 30, 2019 |  |        | 2,450,000 |   |                                            | $ | 0.40  |                                                         | 
|Options granted                   |  |        | -         |   |                                            | $ | -     |                                                         | 
|Options forfeited/cancelled       |  |        | (68,000   | ) |                                            | $ | 0.40  |                                                         | 
|Outstanding at September 30, 2020 |  |        | 2,382,000 |   |                                            | $ | 0.40  |                                                         | 
|Options granted                   |  |        | 2,281,000 |   |                                            | $ | 0.006 |                                                         | 
|Options exercised                 |  |        | (181,250  | ) |                                            | $ | 0.04  |                                                         | 
|Options forfeited/cancelled       |  |        | (315,000  | ) |                                            | $ | 0.006 |                                                         | 
|Outstanding at September 30, 2021 |  |        | 4,166,750 |   |                                            | $ | 0.006 |                                                         | 
|Vested and expected to vest at    |  |        |           |   |                                            |   |       |                                                         | 
|September 30, 2021                |  |        | 4,166,750 |   |                                            | $ | 0.006 |                                                         | 
|Exercisable at September 30, 2021 |  |        | 2,644,813 |   |                                            | $ | 0.006 |                                                         | 



The weighted-average grant date calculated
fair value of options granted during the years ended September 30, 2021 and 2020 was $0.003 and zero, respectively. The total fair value
of shares vested during the years ended September 30, 2021 and 2020 was $10,587 and $12,515, respectively. The intrinsic value of options
exercised was zero for the year ended September 30, 2021.



During the year ended September 30, 2021,
the Company amended substantially all existing option agreements to reduce the exercise price to $0.006 per share. The impact of the option
modification was insignificant.



28







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 7 – STOCK-BASED COMPENSATION (Continued)



As of September 30, 2021, there was $8,376
of unamortized stock-based compensation cost related to unvested stock options which is expected to be recognized over a weighted average
period of 1.36 years.



The calculated fair value option grants
were estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for the year ended September
30, 2021:



|Expected dividend yield (1)  |  |  | 0     | %
|---------------------------- |  |  | ----- | -
|Risk-free interest rate (2)  |  |  | 1.32  | %
|Expected volatility (3)      |  |  | 60.00 | %
|Expected life (in years) (4) |  |  | 6.125 |  



| | (1) | The Company has no history or expectation of paying cash dividends
on its common stock.
| | --- | ---------------------------------------------------------------------------------------

| | (2) | The risk-free interest rate is based on the U.S. Treasury yield
for a term consistent with the expected life of the awards in effect at the time of grant.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The Company has estimated the expected volatility of its share
price based on the share price volatility of similar publicly traded entities.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | The expected life represents the period of time that options
granted are expected to be outstanding and was estimated using the simplified method and essentially equates to the weighted average
of the vesting term and contractual life of the options.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 8 – INCOME TAXES



The provision for income taxes consisted
of the following for the years ended September 30,:



|Current:        |  | 2021 |        |  | 2020 |  
|--------------- |  | ---- | ------ |  | ---- | -
|Federal         |  | $    | -      |  |      | $
|State           |  |      | 1,150  |  |      |  
|Total current   |  | $    | 1,150  |  |      | $
|Deferred:       |  |      |        |  |      |  
|Federal         |  | $    | 13,408 |  |      | $
|State           |  |      | -      |  |      |  
|Total provision |  | $    | 14,558 |  |      | $



29







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 8 – INCOME TAXES (Continued)



The components of the net deferred tax
assets and liabilities are as follows as of September 30,:

|Deferred tax assets:               |  | 2021 |             |   | 2020 |  
|---------------------------------- |  | ---- | ----------- | - | ---- | -
|Net operating loss carryforwards   |  | $    | 11,953,883  |   |      | $
|Derivative liability               |  |      | 1,781,381   |   |      |  
|Fixed assets and intangibles       |  |      | 1,172,582   |   |      |  
|Stock compensation                 |  |      | 172,533     |   |      |  
|Credit carryforwards               |  |      | 697,449     |   |      |  
|Accrued warranty                   |  |      | 45,242      |   |      |  
|Accrued compensation               |  |      | 61,970      |   |      |  
|Deferred revenue                   |  |      | 257,527     |   |      |  
|Other                              |  |      | 1,256       |   |      |  
|Gross deferred tax assets          |  |      | 16,143,823  |   |      |  
|Valuation allowance                |  |      | (15,159,552 | ) |      |  
|Net deferred tax assets            |  |      | 984,271     |   |      |  
|Deferred tax liabilities: Goodwill |  |      | (631,445    | ) |      |  
|Deferred COGS                      |  |      | (232,303    | ) |      |  
|Debt discount                      |  |      | (226,039    | ) |      |  
|Net deferred tax liabilities       |  | $    | (105,516    | ) |      | $



The difference between the provision for
income taxes and the income tax determined by applying the federal statutory rate of 21% is principally due to the changes in the valuation
allowance. The valuation allowance increased $2,544,618 for the year ended September 30, 2021 and increased

$1,917,325 for the year ended September
30, 2020.



30







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 8 – INCOME TAXES (Continued)



Realization of deferred tax assets is
dependent upon future earnings, the timing and amount of which are uncertain. Accordingly, the deferred tax assets have been offset by
a valuation allowance. As of September 30, 2021, the Company had NOL (net operating loss) carryforwards for federal tax purposes totaling
$47,898,999 and for state tax purposes totaling $24,728,119. The NOL carryforwards will begin expiring in 2034 for both federal and state
purposes for tax years before 2018 and post 2017 federal NOLs can be carried forward indefinitely. At September 30, 2021, the Company
also has federal and state research and development tax credit carryforwards of

$382,092 and $382,092, respectively. The
federal tax credits will expire starting in 2034, unless previously utilized. The state tax credits do not expire and can be carried forward
indefinitely.



Utilization of the NOL and tax credit
carryforwards may be subject to a substantial annual limitation due to ownership percentage change limitations that may have occurred
or that could occur in the future, as required by the Internal Revenue Code (the “Code”), as well as similar state provisions.
In general, an “ownership change” as defined by the Code results from a transaction or series of transactions over a three-year
period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders
or public groups. The annual limitation may result in the expiration of the NOL and tax credit carryforwards before utilization.



The Company’s 2014 through 2020
tax years remain open for examination by the federal and state taxing authorities.



NOTE 9 – COMMITMENTS AND CONTINGENCIES



Operating Lease

The Company leases its facilities under
a noncancelable operating lease that expires September 2021. In addition to the base rent, the Company is responsible for certain insurance,
property tax and maintenance expenses under the terms of the facilities lease. The Company recognizes rent on a straight-line basis over
the term of the lease. The difference between required lease payments and straight-line rent expense has been recorded as deferred rent
in the accompanying consolidated balance sheets at September 30, 2021 and 2020. Rent expense for years ended September 30, 2021 and 2020
was $515,663 and $506,237, respectively.



31







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 9 – COMMITMENTS AND CONTINGENCIES (Continued)



Operating Lease (Continued)

Future minimum payments required under the noncancelable operating
lease for future years ending September 30 are as follows:





|2022  |  |  | $ | 573,865   | 
|----- |  |  | - | --------- | 
|2023  |  |  |   | 591,081   | 
|2024  |  |  |   | 608,813   | 
|2025  |  |  |   | 627,078   | 
|2026  |  |  |   | 645,890   | 
|Total |  |  | $ | 3,046,727 | 



Indemnification

In the Company’s sales agreements,
the Company typically agrees to indemnify its customers for any expenses or liability resulting from claimed infringements of patents,
trademarks or copyrights of third parties. The terms of these indemnification agreements are generally perpetual any time after execution
of the agreement. The maximum amount of potential future indemnification is unlimited. To date, the Company has not paid any amounts to
settle claims or defend lawsuits.



Litigation

The Company may from time to time become
involved in various legal proceedings arising in the ordinary course of business. The unfavorable resolution of any such matters could
have a material effect on the Company’s consolidated financial position and results of operations.



NOTE 10 – DEFINED CONTRIBUTION 401(K) PLAN



The Company has a qualified 401(k) plan
for all eligible employees. Employees may contribute up to the statutory maximum, which is set by law each year. The Company does not
currently match contributions.



NOTE 11 – SUBSEQUENT EVENTS



In October 2021, the Company issued two
convertible promissory notes to the related party as disclosed in Note 5, for $1,500,000 total at an annual interest rate of 15% with
a maturity date of December 31, 2022. The holder of the note has the option to convert the outstanding principal into securities to be
issued in the next round of financing, where the number of shares would equate to the outstanding loan balance divided by 80% of the price
per share of the next round price.



32







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 11 – SUBSEQUENT EVENTS (Continued)



In November 2021, the Company issued two
convertible promissory notes to the related party as disclosed in Note 5, for $1,000,000 at an annual interest rate of 15% with a maturity
date of December 31, 2022. The holder of the note has the option to convert the outstanding principal into securities to be issued in
the next round of financing, where the number of shares would equate to the outstanding loan balance divided by 80% of the price per share
of the next round price.



In November 2021,
the Company amended the secured convertible promissory notes with the related party as disclosed in Note 5 to extend the maturity dates
of all the previously issued secured convertible promissory notes to December 31, 2022.



In November 2021, the Company amended
the secured promissory notes with the related party as disclosed in Note 5 to extend the maturity dates of the previously issued secured
promissory notes with principal amounts totaling $5,000,000 to December 31, 2022.



In February 2022, the Company issued a
convertible promissory note to the related party as disclosed in Note 5, for $200,000 total at an annual interest rate of 15% with a maturity
date of December 31, 2022. The holder of the note has the option to convert the outstanding principal into securities to be issued in
the next round of financing, where the number of shares would equate to the outstanding loan balance divided by 80% of the price per share
of the next round price.



In March 2022, the Company amended the
secured promissory notes with the related party as disclosed in Note 5, whereby the Company shall make interest- only payments on a monthly
basis through and including March 31, 2022; thereafter, interest shall accrue but shall not be payable until the maturity date.



In December 2021, the Company entered into
an additional sale and leaseback agreements with the same third party as disclosed in Note 5 for $750,000. The lease has a term of 42
months, with monthly payments of $21,238. In connection with this, the Company issued a warrant to purchase 375,000 shares of common stock
at an exercise price of $0.4 per share which expires in December 2028.



In January 2022, the Company entered into
an additional sale and leaseback agreements with the same third party as disclosed in Note 5 for $750,000. The lease has a term of 54
months, with monthly payments of $21,238. In connection with this, the Company issued a warrant to purchase 187,500 shares of common stock
at an exercise price of $0.4 per share which expires in January 2029.



In March 2022, the Company entered into
an amended and restated lease agreement related to original sale leaseback agreement entered into in January 2021 as disclosed in Note
5, to increase the interest rate from 10% to 12%.



33







INTRAOP MEDICAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS








NOTE 11 – SUBSEQUENT EVENTS (Continued)



In November 2021, the Company renewed the noncancelable operating
lease for its facilities and extended the term of the lease to September 2026.



The Company evaluated subsequent events through April 26, 2022,
the date which the consolidated financial statements were available to be issued.





34